Can MiFIR bring competition to derivatives that EMIR can't reach?

European finance ministers yesterday agreed a common position on the European markets infrastructure regulation that fosters competition in the over-the-counter derivatives market, but rules out an extension of the regulation to listed derivatives.
By None

European finance ministers yesterday agreed a common position on the European markets infrastructure regulation (EMIR) that fosters competition in the over-the-counter (OTC) derivatives market, but rules out an extension of the regulation to listed derivatives.

The version of the text agreed yesterday purports to ensure fair and open access to both trading venues and central counterparties (CCPs) in the OTC derivatives space.

But EMIR will not be extended to listed derivatives, an issue that had been a major sticking point, particularly between the UK and German governments. Press reports claim that UK chancellor George Osborne relented on the point to win a strong commitment to post-trade competition in the OTC market and restrictions on the role of the European Securities and Markets Authority (ESMA) on licencing CCPs.

However, the UK could get a second chance via a new EC regulation intended to complement the Markets in Financial Instruments Directive (MiFID), dubbed MiFIR.

“EMIR is only half the story,” said Sharon Bowles MEP, chair of the European Parliament's Economic and Monetary Affairs Committee (ECON). “All of the conduct of business issues in EMIR, in terms of open access, will also be debated in MiFID and there will be an ongoing battle for openness versus closed structures. Clearing is a quasi-utility, which pushes towards near-monopolies because of margining benefits. A lack of competition will lead to inefficiency and over-expensive services.”

A widely-leaked draft of MiFIR states that trading venues should provide access to CCPs that wish to clear the trades executed on them. While EMIR is focused on derivatives, MiFIR – which will be presented with the new directive on 19 October by the European Commission – would apply to all financial instruments.

Differences between the Council and Parliament drafts of EMIR should be ironed out during the trialogue discussion stage, chaired by Bowles, starting next week. The parties expect the final text to be agreed before the end of the year.

The Council of the European Union's decision not to extend the scope of EMIR to listed contracts will be welcomed by Deutsche Börse and NYSE Euronext, prospective merger partners that, if combined, would control around 95% of European exchange-traded derivatives. The DB/NYSE merger is currently being scrutinised by the competition division of the European Commission (EC). Sources suggest that a statement of objections will be presented by the EC this week.

But not including listed derivatives could harm the potential for multilateral trading facilities (MTFs) – such as Turquoise, owned by the London Stock Exchange (LSE), and Chi-X Europe, which is due to merge with US-owned BATS – to gain a foothold in the derivatives market.

“Important last-minute changes were secured yesterday in terms of giving CCPs open access to trading venues,” said Denzil Jenkins, director of regulation at Chi-X Europe. “While this does recognise the need for more competition in the derivatives market, the same principles need to be applied to listed derivatives and we await progress on this in future discussions.”

Earlier this week, Kevin Milne, director of post trade at the LSE, told, “There is no reason why the same interoperability standards for OTC derivatives should be inappropriate for cash equities or exchange-traded derivatives.”

Shaping the new OTC market

Despite the setback to hopes for post-trade competition for listed derivatives, progress on ensuring access to OTC derivatives market infrastructures was agreed upon during yesterday's Council meeting. Under the Council draft, CCPs must accept trade feeds from any exchange, a measure that had been struck out by MEPs. If adopted, this would require OTC trading venues that also operate their own clearing houses to accept trade feeds from competitors.

According to Anthony Kirby, head of regulatory reform for asset management at consultancy firm Ernst & Young, the agreement on open access in EMIR is a constructive step towards a competitive derivatives landscape.

“A particularly positive consequence of yesterday's debate is that EMIR now links the trading venue access arrangements detailed in the draft version of MiFIR, to the post-trade competition environment that EMIR is attempting to foster,” said Kirby.

G20 response

EMIR was initially drafted by the European Commission as the European response to calls from the Group of 20 to reform the OTC derivatives market following the financial crisis in 2008.

The regulation requires derivatives contracts be standardised where possible so that they can be traded on execution venues and centrally cleared via CCPs. In addition, all derivatives contracts must be reported to trade repositories. Under EMIR, pan-European securities regulator ESMA will take the lead in deciding which derivatives contracts should be made eligible for clearing as well as oversight of CCPs and trade repositories.

Anthony Belchambers, CEO of UK-based trade body the Futures and Options Association, suggested that EMIR's delineation between OTC and listed derivatives would become meaningless as the former became standardised and exchange traded.

“As a significant proportion of OTC derivatives are standardised and will be increasingly traded on multilateral platforms, opening access to OTC derivatives may not amount to very much in the long run,” he said. “A question that needs to be addressed is whether regulators are opening up access to a potentially dwindling set of instruments.”